New Zealand’s Law Commission has drafted a comprehensive new Trusts Act to replace the existing Trustee Act 1956.
The Commission has been working on the project since 2009, although criticisms of the 1956 legislation go back to 2002 at least. It now says the existing statute is ‘in parts unreadable and its provisions are inaccessible when they are most needed to aid with the administration of trusts to allow trusts to fulfil the purposes for which they were set up’. The default provisions no longer represent current good practice, and are a barrier rather an aid to getting trusts right. Moreover it has fostered confusion about the role of settlors, the duties of trustees and the rights of beneficiaries, threatening the institution of the trust.
The matter is a vital one because trusts play an important part in New Zealand law. According to the Commission, there are between 300,000 and 500,000 trusts in use by families, charities, corporations and Maori heritage groups.
Thus the proposed new statute sets out the characteristics of express trusts, both to signal the sorts of arrangements that would be subject to the new Act and also to provide guidance as to what constitutes an express trust.
One of the measures provides a way for the courts to void sham trusts. A court can find that a trust does not exist if it lacks the listed statutory characteristics, says Sabrina Muck of law firm Chapman Tripp. For example, no trust will exist if the sole beneficiary is also the sole trustee, or if the settlor did not intend to create a trust.
The draft law also sets out mandatory trustee duties, implied into every trust. Trustees must adhere to the terms of the trust, act for the benefit of the beneficiaries or to further the purpose of the trust, and exercise their powers for a proper purpose.
One of the most important clauses in the law weakens trustees’ attempts to protect themselves against litigation. Current law permits a trust deed to limit a trustee’s liability or indemnify the trustee against almost any litigation for breach of trust, even where dishonesty is involved. The new law voids any such provisions purporting to protect a trustee where dishonesty, wilful misconduct or gross negligence is alleged. The Commission had originally considered extending this to allow actions to be brought for negligent breach of trust, but was persuaded otherwise, to the relief of professional trustees, says Muck.
A further provision will require trustees to notify all potential beneficiaries of their rights. Anyone who has a ‘realistic possibility’ of receiving trust property must be told that they are beneficiaries, and that they have a right to request information. Trustees must provide sufficient information to sufficient beneficiaries to enable the terms of the trust to be enforced.
The new law will also allow trusts to exist for 150 years rather than the current 80-year limit.
The government will now consider its response to the Law Commission report, after which legislation will in due course be introduced to parliament.
• As well as reforming trust law, the Commission’s proposal also recommends allowing courts to override the placing of assets into trust by a spouse in order to defeat the matrimonial property provisions of the Property (Relationships) Act 1976. It also suggests extending the provision in s182 of the Family Proceedings Act 1980 ‒ regarding the expectations of married beneficiaries of trusts settled in expectation of their marriage ‒ to unmarried persons.